The Public Sector Wage Dispute: Understanding the judgment of the Labour Appeal Court

Introduction

On 24 February 2021, the Minister of Finance, Mr. Tito Mboweni, presented the 2021 Budget.[1] One widely noted feature of the budget is that it relies on the assumption that there will be a salary freeze for public sector employees.[2]

Treasury considers a salary freeze necessary to stop the rising public sector wage bill, which absorbed 41 per cent of government revenues in the FY 2019/20 and 47 per cent of revenue in the FY 2020/21.[3] Treasury says that allowing the wage bill to continue rising “is not sustainable” and would require “a substantial reduction” in funding for public goods and services.[4]

The salary freeze follows on the back of government’s failure to implement the above-CPI salary increases agreed upon for the FY 2020/2021 – the final year of a 3-year wage agreement. The government’s failure to implement the increase gave rise to a dispute between government and public sector trade unions, which was decided in favour of the government by the Labour Appeal Court (“LAC”)[5] in December 2020 but is now before the Constitutional Court.[6]

The LAC declared the salary increases for the FY 2020/2021 unlawful and invalid, because the Executive contravened certain regulations in agreeing to the salary increases without Treasury approval.

In the 2021 Budget Review, the Treasury relies upon the judgment of the LAC to affirm its stance on the salary freeze. It states:

“[T]he Labour Appeal Court reaffirmed the National Treasury’s constitutional role in safeguarding the public finances. In this regard, the approach to future wage negotiations will align with the fiscal position and prevailing economic conditions.”[7]

This brief will consider and evaluate the reasoning of the LAC and consider the implications of its judgment, in light of the approach adopted by Treasury in the 2021 Budget.

Background

In May and June 2018, the government – in its role as employer and represented by the Minister of Public Service and Administration – entered into a collective agreement with the majority of the trade union members[8] to the Public Service Coordinated Bargaining Council (“PSCBC”). The collective agreement provides for salary increases for public service employees over a period of three financial years, namely 2018/2019, 2019/2020 and 2020/2021.[9] The collective agreement was implemented for the financial years 2018/2019 and 2019/2020.

 However, government declined to implement the collective agreement for the FY 2020/2021. The government alleges that implementing the collective agreement for the FY 2020/2021 will cost the fiscus R37.8 billion and that it is unable to afford this cost.

After unsuccessful attempts by the government to revise the collective agreement, various public sector unions[10] (“the respondent unions”) sought arbitration of a dispute concerning the implementation of the collective agreement. However, other unions[11] (“the applicant unions”) launched an application in the LAC seeking an order enforcing the collective agreement for the FY 2020/2021 – causing the arbitration to be postponed.

The application for enforcement of the collective agreement in the LAC was opposed by the Minister of Public Service and Administration and the Minister of Finance (“the government respondents”). In addition, the Minister of Finance launched a counter-application seeking an order declaring the salary increases for the FY 2020/2021 unlawful and invalid.

Judgment of the LAC

The LAC considered the key issue in the dispute to be whether clause 3.3 of the collective agreement, governing salary increases for the financial year 2020/2021, is unlawful and invalid.

The LAC held that the collective agreement was concluded in contravention of Regulations 78 and 79 of the Public Service Regulations (the regulations promulgated under the Public Service Act).[12] Regulation 78 empowers the Executive to engage in collective bargaining and enter into a collective agreement. However, it provides that the Executive may only enter into a collective agreement if the fiscal requirements contained in Regulation 79 are met.

Regulation 79 provides that the Executive shall enter into a collective agreement on a matter that has financial implications only if the costs can be covered from the relevant departmental budget, from additional funds provided by Treasury on the basis of a written commitment, or from the budgets of other departments or agencies with their written agreement and Treasury approval.[13]

The LAC held that clause 3.3 of the collective agreement was concluded in contravention of Regulations 78 and 79, because the cost of implementing the clause could not be covered from the budget of the Department of Public Service and Administration, there was no written commitment from the Treasury to provide additional funds and there was no written agreement or Treasury approval for the costs to be covered from the budgets of other departments or agencies.[14]

The applicant and respondent unions contended that the requirements of Regulations 78 and 79 had been met, because a draft collective agreement had been approved by Cabinet before the offer had been made to the unions. They contended that the government respondents are bound by the Cabinet approval. The LAC held that this did not constitute compliance with the express requirements of Regulations 78 and 79.[15]

In reaching this conclusion, the LAC held that the requirements contained in Regulation 79 must be understood in light of the constitutionally mandated role of the Treasury as “one of the guardrails to ensure that the appropriate standard of constitutional governance is adhered to by the Executive.”[16] The LAC, therefore, insisted on strict compliance with the express requirements of Regulation 79 and held that non-compliance should result in invalidity.

The LAC further rejected arguments made by the unions that the salary increases should be implemented notwithstanding their invalidity. The applicant unions, relying on the Constitutional Court’s judgment in Gijima Holdings,[17] contended that the LAC should exercise its wide remedial power to grant a just and equitable remedy to ensure that government does not benefit from its breach of the requirements of Regulations 78 and 79. The applicant unions, therefore, contended that the LAC should enforce clause 3.3 notwithstanding its invalidity. Similarly, the respondent unions argued that a just and equitable remedy would be to require government to implement clause 3.3. in a “phased in” manner. It was contended that this would vindicate the employees’ constitutional right to bargain.[18]

The LAC distinguished Gijima Holdings – holding that it would not be just and equitable in this particular case to order government to implement clause 3.3 of the collective agreement, notwithstanding its invalidity. It stated:

“An exercise of a discretion depends on the particular case. Under the present financial circumstances, it does not appear to be just and equitable to order government to expend significant and scarce financial resources on employees whose jobs are already secured and salaries have been paid in full, particularly in circumstances where the imperative exists for the recovery of the economy to the benefit of millions of vulnerable people. For example, the provision of social grants to fellow South Africans living on the margin could well be imperilled by such a decision, as might the need to pay for significant and critical additional medical costs caused by the pandemic.

In the exercise of a discretion of the kind set out in Gijima, supra, considerations of the effect on the public purpose in general and the impact on millions of South Africans who barely survive on a day to day basis and need all the help the State may be able to provide are paramount considerations. . . . Government has very limited capacity to borrow additional funds and the national interest burden is now a critical expenditure item in the National Budget. In our view, the normative vision of the Constitution which aims that everyone living in the country should live a dignified life and hence those most in peril should be assisted first dictates the outcome of the discretion in this context.”[19]

The LAC also declined to order implementation of clause 3.3. in a “phased in” manner, because such an order would have polycentric consequences and it would be “inappropriate for the Court to attempt such a difficult fiscal balancing measure”.[20]

The LAC, accordingly, gave an order declaring clause 3.3. of the collective agreement unlawful and invalid for contravention of Regulations 78 and 79 and dismissing the trade union applicants’ application.

Implications of the LAC’s judgment for the role of Treasury in collective bargaining

The LAC held that the failure on the part of the Executive to obtain Treasury approval when agreeing to salary increases in a collective agreement, the cost of which could not be covered from the relevant departmental budget, should result in the agreed-upon increases being declared unlawful and invalid.

This, in effect, gives Treasury a veto power over collective agreements with financial implications, unless the relevant executive authority can cover the costs from his or her own departmental budget. Thus, giving Treasury a major boost in its efforts to lower the public sector wage bill.

A major consideration in the LAC’s reasoning was that requiring strict compliance with the regulatory requirements concerning Treasury approval would give effect to the constitutionally mandated role of Treasury in section 216 as a guardrail for public expenditure.

Section 216 of the Constitution envisages Treasury playing a key role in regulating the use of public funds and even, in certain circumstances, withholding public funds.[21] Section 216(1) contemplates the introduction of standards and norms to ensure transparency and expenditure control in each sphere of government.[22] And section 216(2) compels Treasury to enforce compliance with these standards and norms, and empowers Treasury to withhold funds in the case of a serious or persistent material breach.

This has, however, been described as narrow role restricted to the formal regulation of norms and standards.[23] The LAC judgment contemplates a more interventionist role for Treasury – giving it veto power over executive decisions to enter into collective agreements with financial implications that exceed amounts approved by Parliament. The LAC judgment is consistent with a legislative trend that provides for a more interventionist role for Treasury in executive decision-making.[24]

While it may not be constitutionally mandated, a more interventionist role for Treasury serves to protect macro-economic stability, and to ensure that government is able to fulfil its constitutional obligation to make resources available for the fulfilment of socio-economic rights.

If the Executive is able to enter into collective agreements, without Treasury approval, increasing the public sector wage bill beyond what Parliament has approved, this will have detrimental impacts on our economic stability and may require the allocation of funds away from essential public goods and services. Giving Treasury an oversight role and approval power in collective bargaining will serve to avoid this untenable situation.

Conclusion

The LAC judgment and order has emboldened Treasury in its steps to reduce the public sector wage bill. Giving Treasury, in effect, a veto power over executive decision-making in collective bargaining has strengthened Treasury’s hand considerably. It awaits to be seen what decision the Constitutional Court will reach in this dispute.

Catherine Kruyer
Legal Researcher
Catherine@hsf.org.za

[1]See documents relevant to the 2021 Budget here.